microeconomics ch 6

• What is the main focus of Chapter 6 in the book?

  The theory of the firm
• What does the theory of the firm describe?

  Cost-minimizing production decisions and cost variation
• What are the three steps in the production decisions of firms?

  1. Production Technology
  2. Cost Constraints
  3. Input Choices
• What are the broad categories of inputs in production?

  Labor, materials, and capital
• What does the production function show?

  The highest output for specified input combinations
• What is the short run in production?

  Period where some inputs cannot change
• What is a fixed input?

  Production factor that cannot be varied
• What is the long run in production?

  Time needed to make all inputs variable
• What is the average product?

  Output per unit of a particular input
• What is the marginal product?

  Additional output from increasing an input
• How does the marginal product of labor depend on capital?

  It increases with more capital used
• How is the average product of labor calculated?

  Average product = $q/L$
• How is the marginal product of labor calculated?

  Marginal product = $\Delta q/\Delta L$
• What does the total output curve show?

  • Output produced for different labor inputs
  • Relationship between average and marginal products
• What happens to the marginal product at point A with 3 units of labor?

  Marginal product is 29
• What is the average product of labor at point A?

  Average product is 23
• What occurs at point B with 5 units of labor?

  Marginal product equals average product
• What does the average product curve indicate?

  It is the slope from the origin to the total product
• What does the marginal product curve indicate?

  It is the slope of the total product at a point
• What is the law of diminishing marginal returns?

  Output additions decrease as input use increases
• How can labor productivity increase despite diminishing returns?

  Through improvements in technology
• What is an isoquant?

  Curve showing combinations of inputs for same output
• What is an isoquant map?

  Graph combining multiple isoquants
• What does input flexibility in isoquants indicate?

  Firms can substitute inputs for output
• What happens to output as each input is increased?

  Output increases but with diminishing returns
• What is the marginal rate of technical substitution (MRTS)?

  Amount one input can be reduced for another
• How is MRTS calculated?

  MRTS = $-Change in capital/Change in labor$
• What do isoquants resemble in shape?

  They are downward sloping and convex
• What are the two extreme cases of production functions?

  Perfect substitutes and fixed proportions
• What characterizes a fixed-proportions production function?

  Only one combination of inputs produces output
• What happens when isoquants are straight lines?

  MRTS is constant across input levels
• What happens when isoquants are L-shaped?

  Only one combination of inputs can produce output
• What are returns to scale?

  Rate of output increase as inputs increase
• What are increasing returns to scale?

  Output more than doubles when inputs are doubled
• What are constant returns to scale?

  Output doubles when inputs are doubled
• What are decreasing returns to scale?

  Output less than doubles when inputs are doubled
• How can returns to scale vary?

  They can differ across output levels
• What does a firm's production function exhibit at lower output levels?

  Increasing returns to scale
• What happens to isoquants when a firm has constant returns to scale?

  Isoquants are equally spaced as output increases
• What happens to isoquants with increasing returns to scale?

  Isoquants move closer together as inputs increase